For more than a decade National Australia Bank has underperformed its big four banking peers on the sharemarket in terms of total returns on shareholder funds and return on equity. Its latest full year results are unlikely to change any of that, particularly its second half earnings.

The result offers up more disappointments, particularly from its UK business and to a lesser extent its business banking operations, which suffered a rise in bad and doubtful debts.

On the domestic front, its performance is not all that different from ANZ, as the cost of deposits increased, but the UK casts a cloud over the overall result.

In the year to September 30 the bank posted a 0.5 per cent fall in total cash earnings to $5.4 billion, but deteriorating rapidly in the second half – down 7.9 per cent – largely due to a blow out in bad and doubtful debts in its UK business and its business banking division. It also reflects the slowing Australian economy.

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Its business banking division cash earnings dipped 1.5 per cent over the year to $2.4 billion, largely due to an 11 per cent jump in bad and doubtful debts in this division to $893 million for the full year.

NAB’s total bad and doubtful debts rose 44 per cent to $2.6 billion, with $960 million coming from its UK banking business, which suffered a cash earnings loss of £139 million in the year to September 2012.

The bank's shares recovered early losses of as much as 1.4 per cent to be slightly higher around midday at $25.89, up 1 cent. The stock is up 10.8 per cent since the beginning of the year, while Westpac has risen 27.1 per cent, ANZ is up 23.4 per cent and CBA 16.7 per cent.

If the economies of Europe and Australia continue to deteriorate, the expectation is that NAB’s bad and doubtful debts will follow suit, which will weigh on the group’s earnings.

Today’s results will put added pressure on NAB chief Cameron Clyne, who has been in the top job for almost four years, after a meteoric rise, and who now finds the bank is going backwards.

To be fair most of the problem lies in the UK and Clyne inherited the UK mess, but it is intensifying under his watch. The finger now needs to be firmly pointed at the board, which made the error of not extricating the bank from the UK a few years ago when it had the chance. Investors are now paying a heavy price.

The UK has been an albatross around the bank’s neck for years. The big hope is that when the UK economy eventually emerges from the mire it has found itself in, NAB will be in a position to sell its UK banks. These assets do not fit in with NAB in the longer term – they never did.

They have always lacked scale, they have taken up a lot of management time and as conditions worsened in the UK in the past few years they became a bigger and bigger drag on the bank’s earnings base and return on equity.

In its personal banking division, cash earnings rose 12.1 per cent, or $113 million, to $1 billion, with most of the gain coming in the second half, which was up 25.2 per cent. However, the high costs of deposits in Australia was a drag on net interest margins, which decreased by 16 basis points compared to the previous corresponding year.

NAB’s NIM in this division improved by two basis points in the March half as the bank re-priced its mortgages.

In a press statement Clyne said: “The Australian economy has performed well relative to other advanced economies, although business conditions across sectors remain mixed reflecting the prolonged global uncertainty and weak confidence.”

He is right, but there is no escaping its UK business, which has been a drag for years. This result would have been treated differently by the market if not for the UK.

10 comments

CEO's and boards are meant to drive long term strategies. Again and again, many corporate problems of the last decade have been shown to be results of the ineffectiveness of CEO's and boards. And yet, they continue to get paid tens of millions of dollars during their tenure. Who needs CEO's and boards, just let corporate middle management run the business. If nothing else, no so called strategies would kill the business off or damage it the way NAB's UK and US adventures have.

Commenter

JJ

Location

Hornsby

Date and time

October 31, 2012, 11:31AM

At least they were honest when they said they were broken up with the other banks in the big four.

Commenter

PeeRod

Location

Date and time

October 31, 2012, 12:27PM

Can I just say, this is the most ignorant comment I've ever read on SMH. You actually think it's OK for corporate middle management to run a $700bn asset company? On what planet is this acceptable?

You clearly have no understanding of banking and how large corporations are run, managing the challenges facing banking today (BASEL III, shrinking funding base, low credit growth, etc).

"Who needs CEOs and boards?" So you think CBA became one of the best-performing banks in the world without Ralph Norris, did it? Did ANZ's super regional strategy just magically spring to being without Mike Smith?

The one thing I can agree with is that in the past, NAB corporate bosses have shown themselves to be highly incompetent and was the one bank in Australia famous for having the worst corporate culture.

Commenter

David

Location

Melbourne

Date and time

October 31, 2012, 1:49PM

The strategy goes back to Don Argus and the woeful Frank Cicutto. It is amazing that once momentum is lost and poor decisions made how long such things take to play out. Todays outcomes are the result of decisions made 10-15 years ago.

Commenter

Blower

Location

Melbourne

Date and time

October 31, 2012, 2:35PM

We had this conversation a week or so back. With some posters claiming NAB to be a good trading stock between $22 and $26. As a former NAB warrant holder Adele has the heading here deadly correct.... "perennial underperformer" Old saying "first loss is often the best loss". Perhaps NAB should have cut it's UK losses years ago.

Commenter

MelbMan

Location

Date and time

October 31, 2012, 12:20PM

NAB has the most to gain. When the times are good the other 3 banks are already at a near high trading price. NAB will also dominate the market cap range when EU (if ever) get their act together.

Commenter

Liberator

Location

SEQLD

Date and time

October 31, 2012, 2:29PM

Nab really do not have a clue when it comes to banking. Their "we are different" campaign was a waste of money, whereas CBA's CAN campaign was perfectly timed for the Olympics.Didnt the NAB strategists see a recession looming in the UK before they bought the UK bank ? Any amateur chartist could have see that coming. At least ANZ , with its Asian strategy has benefitted from the boom in the Asian economies the past few years. Westpac buying St.George was a winner. Likewise CBA buying Bankwest. But NAB ? Honestly, the board should be sacked, as they have no idea. I'm glad I sold my share at the recent top.

Commenter

Nabbed

Location

Sydney

Date and time

October 31, 2012, 2:31PM

The banks were bought in the late 1980's during the Nobby Clark era, do not believe the chartists were calling for the GFC quite that early. However there have been opportunities to sell off during the last few years. Leadership prior to Clyne were unwilling to compromise on price and he now is stuck with some dogs that are going to look sick for quite a few years more. Pity really because the domestic business is probably performing better than any time in the last 15 years

Commenter

oldtimer

Location

melbourne

Date and time

October 31, 2012, 4:30PM

Gee those strategists must have had great foresight, considering the Yorkshire Bank was bought in 1987 and the Clydesdale Bank in 1990. I did not see too many complaining when the NAB were banking profits enhanced by the low Australian dollar over the 1990's and early 2000's.

Commenter

Roo

Location

Date and time

October 31, 2012, 4:31PM

remember Homeside bought from the US for Billons.Should be called Homicide what management has done to this bank.